Wednesday, August 12, 2015

11th Circuit recognizes contributory false advertising theory

Plaintiff DFA operates duty free stores in many
international airports nationwide.It
sued Estée Lauder, arguing that Estée Lauder’s refusal to do business with DFA,
and its communication of that fact to airport authorities evaluating whether to
offer rental space to DFA, violated federal and state law, alleging attempted
monopolization in violation of § 2 of the Sherman Act; contributory false
advertising, in violation of § 43(a) of the Lanham Act; and tortious
interference with a prospective business relationship, in violation of Florida
law. The court of appeals affirmed the dismissal of these claims.

DFA is one of about ten major operators of duty free stores
in the US, with leases in 13 international airports in eleven cities. “It
competes with other duty free operators for the limited rental space available
in U.S. airports servicing international flights.” Leases generally last from
5-10 years.Interested duty free
operators bid for space, explaining what they’d carry and how much they’d
pay.There’s a minimum annual guarantee
plus a percentage of sales revenue. Beauty products are a substantial component
of duty free stores’ products, and Estée Lauder is the “largest manufacturer of
beauty products sold in duty-free stores in U.S. airports.” In 2010, Estée
Lauder’s market share of cosmetics sold in duty free stores was approximately
45.71%, while its market share for skin care products was over 50%. Newcomers to the duty free beauty products
market are apparently rare.

DFA bought Estée Lauder beauty products to sell in its duty
free stores until June 2008, during which time Estée Lauder set two different
prices for each product—a suggested domestic retail price and a lower suggested
travel retail price.Duty free operators
could buy at wholesale travel prices that were lower than wholesale domestic
prices, set by discounting the suggested travel retail prices—for most of the
time, the suggested travel retail price for beauty products offered customers a
10% discount off of the suggested domestic retail price.Estée Lauder required operators to carry the
full line of products within a particular brand and carry the company’s
less-popular fragrances if they wanted to sell cosmetics. “Estée Lauder also
mandated that operators reserve display space of a certain size and quality for
its products and that they keep excess inventory in stock, and routinely
threatened to cut off all product supply when duty free operators resisted
these conditions.”

Then Estée Lauder announced plans to eliminate the
differences between its suggested domestic retail prices and suggested travel
retail prices, which would increase the prices DFA paid for Estée Lauder
products and eliminate the discount that DFA’s customers gained by shopping at
duty free stores. As a result, DFA ended its business dealings with Estée
Lauder; DFA sought to revive the relationship, but Estée Lauder refused.This caused DFA trouble in subsequent bidding
for retail space at four international airports.

For example, when Newark’s Liberty International Airport
issued a request for proposals, Estée Lauder’s President of Travel Retailing
Worldwide sent a letter to the leasing agent responsible for administering
Newark’s bidding. The letter included a list of duty free operators that sold
Estée Lauder products—the three other bidders, but not DFA.It said: “We are confident that each of these
authorized retailers brings the expected quality of in-store execution and
required operational excellence necessary to represent our brands and service
your valued passengers.” DFA lost the bid; it ranked second to last, with the
explanation being “Duty Free Americas does not have the rights to sell Est[é]e
Lauder brands.”Other bidders, in other
bids, emphasized their ability to sell Estée Lauder.

The Sherman Act claims failed, of course.

On the false advertising claim, DFA alleged that Estée
Lauder was subject to contributory liability for DFA’s competitors’ false
advertising.Estée Lauder argued that
the Lanham Act doesn’t recognize contributory liability for false advertising,
but the court of appeals disagreed.

In trademark, contributory liability is well-recognized, and
for the same reasons, contributory false advertising should be as well.§43(a), after all, contains both trademark
and false advertising provisions, sharing the same introductory clause.That suggests that “the two causes of action
should be interpreted to have the same scope,” especially since they have the
unitary purpose of protecting commercial actors against unfair competition.“It would be odd indeed for us to narrow the
scope of the false advertising provision—a cause of action plainly intended to
encompass a broader spectrum of protection—and hold that it could be enforced
only against a smaller class of defendants.”

In order to state a claim for contributory false advertising claim, “[f]irst,
the plaintiff must show that a third party in fact directly engaged in false
advertising that injured the plaintiff. Second, the plaintiff must allege that
the defendant contributed to that conduct either by knowingly inducing or
causing the conduct, or by materially participating in it.”This participation requires that “the
defendant actively and materially furthered the unlawful conduct—either by
inducing it, causing it, or in some other way working to bring it about.”Participation could include direct control or
monitoring of a third party’s false advertising.“It is also conceivable that there could be
circumstances under which the provision of a necessary product or service,
without which the false advertising would not be possible, could support a
theory of contributory liability.”

In order to adequately plead contributory false advertising,
the court asked whether the complaint suggests a plausible inference of knowing
or intentional participation, examining “the nature and extent of the
communication” between the third party and the defendant regarding the false
advertising; “whether or not the [defendant] explicitly or implicitly
encouraged” the false advertising; whether the false advertising “is serious
and widespread,” making it more likely that the defendant “kn[ew] about and
condone[d] the acts”; and whether the defendant engaged in “bad faith refusal
to exercise a clear contractual power to halt” the false advertising.

The complaint identified five allegedly false claims.One duty free bidder said: “Given that Estée
Lauder brands account for 20% of cosmetic and fragrance sales, at least in
Orlando, and cosmetic and fragrance sales constitute one of the largest sources
of revenue for duty free stores, a lack of access to Estée Lauder brands would
cast doubt on the validity of DFA’s projected revenue streams.” Two other
statements were to the same effect, and a fourth was that “DFA sales
project[ions] are deemed to be unreasonable and not sustainable in light of the
history.” Finally, one bidder said that “DFA may have made misrepresentations
about its ability to carry Estée Lauder brands.”

However, the complaint didn’t adequately allege that Estée
Lauder contributed to any of the statements.Alleging that Estée Lauder had knowledge of the false claims but
continued to supply the duty free operators was not enough: mere sale of Estée
Lauder products was no basis for holding Estée Lauder liable “for any
disparaging statements its customers make in the course of their own separate
business relations.” Estée Lauder sales were “too unrelated to the making of
the allegedly false or misleading statements to form a basis for
liability—under either an inducement or participation theory.”And no facts in the complaint suggested the
existence of coordinated action or encouragement, or inducement, between Estée
Lauder and the operators on the decision to make the disputed claims to airport
authorities. There was no allegation that Estée Lauder monitored, controlled,
or participated in duty free operators’ bids, either here or in general.

Finally, DFA tortious interference claim failed, for similar
reasons.DFA didn’t allege that Estée
Lauder ever expressed its opinions about DFA to airport officials.The letter vouching for the quality of other
duty free operators could not be read to implicitly disparage the quality of
all other unmentioned entities in the same industry. Adequately alleged
inducement of misrepresentations might qualify as tortious interference under
Florida law, but see above.

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